I’ll take some heat for this blog.
I can already anticipate some eye rolling, some emails, maybe a phone call or two.
Likely a few flames thrown my way in some internet forums.
By and large, my peers won’t like this.
But over the past year or two, a trend has emerged in the residential property management industry that has caused me some concern.
So much of a concern, that I thought it was time to discuss it in an open forum.
As someone who values our industry, wants to protect it, and wants it to succeed, I’m afraid we’re well down a road that needs a better road map.
So, I’m a big boy and I’ll gladly accept any backlash that may occur.
The topic centers around Tenant fees - fees that a Property Management Company charges a Tenant that go directly to the PM Company and not the Owner.
Several years ago, Tenant fees consisted of the basics:
- Application fees
- Late fees
- Eviction administration fees
Those were the main fees Property Managers charged Tenants and probably a few more.
But the reality was that most - the vast majority, in fact - of the revenue achieved in our industry came from our Owner Clients in the form of Leasing Fees, Management Fees, Renewal Fees, etc.
The Transformation of the Single Family, Indianapolis Property Management Industry
Back in early 2000, my business partner and I had amassed a lot of rental properties that we self-managed.
We were flipping a lot of homes back then, too. That kind of business takes time… time to research, time to attend auctions, time to coordinate rehabs, etc.
Since time was at a premium, we looked to outsource the management of our rentals.
We were shocked at what we found and at what we didn’t find.
Indianapolis, at that time, had very few single family property management companies. The ones that did exist either didn’t call us back, or were HIGHLY unprofessional.
True story… I was provided a Property Management Agreement in early 2000 from a local Property Manager that had edits and changes to the PMA literally hand-written in the margin. It was crazy, but it was a reality and reason for us to continue to self-manage.
When we jumped into the 3rd party property management back in 2007, we quickly became one of our area leaders, because our competition just wasn’t all that good.
Now, fast forward to today.
Clearly, our industry has undergone a transformation of sorts and has gotten better. Single family homes, as soon as Warren Buffett made his declaration that he thought it would be a good idea to buy a “couple hundred thousand homes” became the target of Wall Street types who have done a lot to, for lack of a better term, “professionalize” our industry.
Overall, PM businesses are run better and, as a result of the mass investment in single family homes, there is more demand for our services and A LOT more PM companies out there.
More Competition Equals Pricing Pressure
With the emergence of all these new PM companies, the natural result was lower fee structures. For those companies new in the marketplace and trying to establish a reputation, lowering price was one of the easier ways to get business.
So, there are now a lot of low-cost providers out there. Leasing fees are being reduced, management fees as well.
But, as anyone who has been in our industry for any time knows, running an effective management company is expensive, so revenue has to come from somewhere.
Shift from Owner Fees to Tenant Fees
To make up for these reduced Owner-related fees, PM Companies are now adding on additional Tenant fees.
Piling on, in some cases.
Our industry now has people literally devoted to advise PM companies on how to add fees, most of which go right to the PM Company and most of which are aimed at Tenants. Some of these fees include:
- Monthly Technology Fees
- Risk Mitigation Fees
- Monthly Animal Administration Fees
The prevailing notion is that, “if you can justify it, you can charge it.”
I can “justify” all kinds of fees, but that doesn’t mean they are fair or appropriate.
How about this one… a “Tenant Pain in the Butt Fee.” This is a fee that we would charge Tenants if they complained too much.
Here’s how we justify it...
Tenant: “So, I’m reviewing the Lease, and I see that Clause 97 has a 'Tenant Pain in the Butt Fee.' What the heck is that?”
PM Company: “Well, as anyone in our industry knows, upset Tenants can take up an enormous amount of our staff’s time and energy. Please understand that we’re here to help you, you are our Customer and we want to ensure you have a good experience. So, you are free to contact our Office up to twice each month for absolutely no charge at all. But, any correspondence that requires more than two responses in a given month will be subject to a $25 admin fee per incident. You have to understand that if every Tenant contacted us more than twice a month, we would have to double the size of our staff, so we have to charge accordingly.”
OK, maybe that’s not the best example, but I hope the point is made. Just because you can frame a justification around the fee doesn’t make it right.
And, for you PMs out there reading this, I hope I haven’t given you any ideas.
Risk Mitigation Fees
I won’t spend a lot of time debating all the various fees that Tenants are charged. There are too many and it wouldn’t be productive.
However, I will discuss one: the Risk Mitigation Fee.
This is a popular fee in our industry. There are a lot of companies that charge it and the “justifications” are just… weak.
Here’s how this fee works. The PM company runs credit on an applicant. Unless you have a credit score that exceeds 750 (in most cases), you will pay the PM company a Risk Mitigation Fee.
Keep in mind that you can be approved for a mortgage with scores as low as 600 in today’s lending environment. However, if you score a 600 with some PM companies, you’ll pay hundreds of additional dollars for this fee… all of which goes right to the PM company and not to the Owner.
The justification for the fee is that the applicant will likely pose a collection or eviction risk, and the PM company “must be compensated accordingly.”
So, let’s say that someone applies for a property, has a 500 credit score, pays a $1,250 Risk Mitigation Fee and is evicted within 3 months.
Property Managers are Charged with Acting in our Client's Best Interest
Acting in our Owner Client's best interest is a staple of our industry. It's a basic Agency requirement and there's no negotiation on this premise.
How did that Risk Mitigation Fee help the Owner?
Even worse, the fee creates an inherent conflict of interest, since the less qualified the applicant, the more fee the PM Company will receive. And the less qualified the applicant, the more risk an Owner has of a failed tenancy.
Further, PM companies that charge this fee, in my opinion, create a huge barrier to some Tenants. The home, without question, can be more difficult to rent because of the additional fees imposed.
Again, how does this work in the Owner’s best interest?
The better option is to simply charge a higher deposit for riskier applicants. That makes sense and does serve the Owner’s interests.
More Tenant Fees Can Hurt Retention
You know what we always say… vacancy is a cash flow killer. A good PM company will pay for itself if it keeps properties occupied and performing for their Owner Clients.
The reality is that most Tenants will sign up for a home without ever reviewing the Lease. Sounds crazy, but it happens all the time.
Once the PM starts enforcing that Lease is where conflict can arise.
For example, a Tenant signs the Lease. The PM then loads up the ledger with various charges… Security Deposit, Risk Mitigation Fee, Monthly Technology Fee, Monthly Pet Premium Fee, etc.
Tenant calls and is upset.
The PM explains that all the fees were disclosed in Clause 212 of their Lease. The Lease is signed, the fees are due.
It’s not such a great way to start a relationship and one that the Tenant may very well end as soon as possible.
Over the past few years, as competition has increased, we've lost some Clients to lower-cost providers.
Many times - no exaggeration - the Tenants associated with those homes have reached out to us, indicating they were vacating the home at the conclusion and their Lease and in search of new housing.
New housing, by the way, with us.
The reason? Too many fees from their new, inherited PM.
So, tell me… who is the loser here?
Yes, the Owner.
While this Owner may have paid less fees to the management company, they paid dearly for a vacancy because of the fees charged to the Tenant.
Why Am I So Concerned About This?
Our industry has a trust problem that it’s yet to fully overcome.
There’s a reason that the majority of rental homes in the United States are self-managed. Generally, Property Managers in the U.S. are not trusted.
And there are reasons for that… some of which I discussed at the top of this blog.
While we have made some progress in terms of professionalism and generally just doing a better job, this new trend toward heavy Tenant fees - I think - could erode some of that progress.
What if Investors began realizing that Tenants were vacating homes solely because of excessive fees charged by the Property Manager that was supposedly making decisions based on the Owner's best interest?
Would they feel good about their PM?
Would they feel misled - betrayed even?
I would. I want a PM that serves my interests, not one that chases away good Tenants with fees that benefit me in no way.
Almost no Owners we work with - and we’ve worked with thousands over the years - are or have been concerned about what fees we charge our Tenants. They are only concerned with what we charge them.
Now, if more Tenants start to complain about excessive fees, and class action lawsuits start to get traction, that could very well change.
Should Property Managers Fully Disclose Tenant Fees to Owners?
As is the case with most PM Companies, the Pricing Page of our website is the most trafficked page we have.
We track everything and I don’t think we’ve signed up an Owner, since the Pricing Page existed, who hasn’t visited the page.
We are considering adding a section to the page to detail exactly what we charge Tenants. Doing so will likely put us at a huge competitive advantage in our market.
I realize that, in a lot of cases, Tenant fees are on Tenant-facing web pages within PM websites. But, those pages are rarely visited by even Tenants and, my guess, almost never visited by Owners.
Whether or not PMs should be required to disclose Tenant fees within a PMA, for example is, I’m sure, up for debate. But, in the effort to be completely transparent with our Clients, why not disclose them?
That is, unless there’s something to hide.
Property Managers Can Do Better
Again, my main objective in writing this blog is to shed some light on a what I consider a dark trend.
I urge PMs to stop bragging about the “17 different fees I charge my Tenants” and, instead, focus on providing great service to both their Owner Clients and Tenants.
Investors, as we know very well, will pay a premium for great property management. You can continue to grow and be profitable without becoming fee hungry.
We can do better and I hope we can all agree to that.